Tag: interest rates

Market Commentary 2/4/22

Posted on by Admin

Yields Spike On Blow Out Jobs Number 

The Jobs picture proved to be better than expected as November and December payroll data was revised up by a total of 709,000 jobs. The January employment report gain of 467,000 caught many forecasters off-guard. Most believed the combination of the Omicron variant, reduction in seasonal holiday jobs, and decreased travel spending, would prevent such a robust report.  More importantly, bonds spiked due to the better expected report and the increase in average hourly earnings, which rose .7%, above the .5% expected (remember wage inflation is sticky). The January Jobs Report has all but cemented a March lift-off in short-term interest rates.  A 50 BPS point rate increase can no longer be discounted as the labor market is tighter than expected and inflation is proving to be harder to tame.   

Across the pond is the same story as inflation is smashing records.  The Bank of England raised overnight lending rates and the ECB had to walk back dovish commentary on rate increases as fears of inflation threaten to become embedded within their economy.  Rising global rates will put pressure on the U.S. to act as well.  It can be argued that various central bankers waited too long to raise rates and are now embarking on a rate increase path while the global economic recovery is showing signs of possible slowing. A mixed bag of earnings is providing no clear sign of where the economy is headed.  Common themes in earnings reports relate to ongoing issues with inflationary pressures and supply chains. How much cost companies can pass on to consumers will decide which industries do well and which are hit hard in the coming months.  Oil is now above 90 per barrel. Food and basic goods have all increased in price. If this continues it will hit the economy as consumers’ pocketbooks are getting stretched.     

Volatility in both equities and bonds is expected to continue with the Fed’s focus more on main street instead of Wall Street.  How far markets would have to slide for the so-called Fed to be activated is anyone’s guess. However, with 40% of Americans uninvested in the stock market and really feeling the pinch of inflation and two years of lockdowns due to Covid, the Fed will let markets fall as they beat down inflation. A volatile equity market may be a good thing for real estate purchases as it will provide a more level playing field for buyers and sellers. Rising rates, which are still very low but not in the extraordinarily low bucket any longer, will also keep real estate values from ascending at the recent clip. Keeping home affordability sustainable will be key to the housing market going forward.  For those on the fence and worried about monthly mortgage payments, now is time to move as rates seem headed about 2.000% on the 10-Year Treasury note. Careful attention must now be placed on the 2-10 Treasury spread as it flattens. This could be a sign of tougher times if this relationship is compressed further.  Also, Fed speak in the coming weeks will be watched closely. The markets are fragile and a misstep by the Fed could create increased volatility and large price swings in bonds and equities.  

Market Commentary 1/7/22

Posted on by Admin

Fed Signals Rates Will Rise In 2022 With Inflation Running At 30 Year Highs

It has been a forgettable start to 2022 for the U.S. financial markets, and more specifically, for many tech companies and bond investors. While the last several weeks of 2021 were quite volatile, Wednesday’s hawkish release of the Fed minutes crushed many stocks and also shook the bond market.

Inflation is now a major concern for the Fed. Friday’s Job Report, which contained both positive and negative elements about the employment picture, reinforces the belief that the U.S. economy is near full employment. The current unemployment rate stands at 3.90% with many million job openings still remaining. Wages continue to increase running above many expectations, but, these wage increases are not keeping pace with consumer inflation and this is what the Fed is worried about.

Housing demand remains robust. Should interest rates continue to rise, housing demand and housing affordability will be impacted. However, with the housing supply still too low, housing demand should not dip too much. Lumber will be important to watch as it has quietly gone back up to a 7-month-high. Increased labor costs for construction workers are also a concern along with supply chain issues. Higher rates will force builders to work on keeping costs down on new home builds. It is too early to tell what could happen but homebuilder stocks have not traded well to start the year even as demand is strong.

Another hot CPI report is expected for December, which is due out next week.  While the market is already pricing in the likelihood of ongoing inflation, interest rates will be under continued pressure as both PPI and CPI inflation readings run at 30-year highs. We don’t recommend sitting around waiting for interest rates to abate or the Fed to pump large-scale stimulus into the economy in response to the Omicron outbreak.  Borrowers who have not taken advantage of the ultra-low rate environment still have some time to lock in very attractive interest rates. For those borrowers with complex financials, Insignia Mortgage has several local banks and credit unions willing to work closely with us to approve loans that larger institutions simply won’t take the time to underwrite. Interest-only products are abundant, as are mortgages for second homes and investment properties.

Market Commentary 10/29/21

Posted on by Admin

The upcoming weeks are developing into an interesting time for the financial markets. While the argument can be made that all things are transitory, the Fed’s definition of transitory has been a few months. Core inflation is at a thirty-year high with no sign of abatement. Inflation appears likely to linger. Many of America’s best companies have commented about the supply chain and labor shortages. Numerous companies are offering several thousand dollars in signing bonuses to entry-level employees just to attract new hires. Other companies are addressing the employee shortage by finding their own logistics solutions to get goods to their customers. 

Rising inflation is just not a U.S. issue. As the world recovers from the shock and reopening of COVID, the global supply chain has been broken. Some countries have seen enough of rising prices. The combination of surging demand with easy monetary and fiscal policy has created a massive amount of money in the global financial system. 

To combat run-away inflation, some foreign central banks have begun raising short-term interest rates. It is not believed the U.S. is ready to raise interest rates, but the Fed has been signaling its intention of slowing the pace of purchases of bonds and mortgage-backed securities, a measure known as Quantitative Easing.  By signaling the market of this intention, the Fed is hopeful the markets will take the news in stride. So far, so good. But there is no doubt that policymakers will be monitoring the markets very closely should the taper become official.

The Biden infrastructure, social welfare, and taxation plan are still not a done deal. Odds are that the plans will be implemented. There has not been enough time to adequately review the policy and how it might affect the U.S. financial and real estate markets.  However, as we have opined previously, we don’t like the idea of increased taxes on capital gains on investments, especially if not inflation-adjusted. If taxes are raised too high on speculative investments, the desire to take risks will diminish. 

The bond market remains sanguine on inflation but the yield curve has begun to flatten as future rate hikes seem more likely. As a result, slowed economic growth is probable. Remember, the Fed can control the short end of the curve but not the long end of the curve (unless the Fed implements yield curve control). Many banks price corporate bonds off of the 5-year Treasury so as this yield rises, so will corporate interest expense.  With mortgage rates drifting higher, loan volume has slowed. This should come as no surprise. Alternative mortgage products are leading the charge for many of Insignia Mortgage’s clients. Many new home buyers and refinance applicants are not bankable with traditional lenders as many applicants have opaque financial structures. This segment of applicants tends to have hard to understand income, be from a foreign country, or are quite substantial from an asset standpoint. Real estate has been a great hedge against inflation historically. The combination of low-interest rates and rising real estate values continue to keep transaction activity high.

07_23_2021_blog

Market Commentary 7/23/21

Posted on by Damon Germanides

Bond Markets Await Big Inflation Reading Next Week

Equity markets started the week with a big downdraft but have rebounded to new highs. Bonds dipped and then rebounded. This all supports the notion that we should expect to see more volatility in the coming months. While equity markets appear fully priced, the bond market’s paltry yields will continue to support riskier behavior. This will bode well for equities and alternative assets including real estate and private equity.  

Central banks continue to reinforce low rates for longer as the Delta variant spreads and creates more uncertainty about the pandemic and how it will affect the reopening of the world’s economy. 

Next week will be an important one as the Fed’s favorite inflation indicator, the core PCE, reports for June. Inflation is front-page news and the debates are ongoing about whether inflation is transitory or sticky. It will be interesting to see the responses from both sides on the current state of inflation. Bond yields will be on edge as it awaits this critical report. 

Mortgage rates have held up well during this time. While it is hard to argue for lower interest rates as the economy improves, the Delta variant has increased the risk of a market setback which has helped keep interest rates low.

Market Commentary 7/16/21

Posted on by Admin

Refinances Surge As Bond Yields Drop

Bond rates continue to dip even as inflation readings run hotter than expected. It is true that some inflation appears to be transitory as evidenced by the expected drop in used car prices and the dramatic fall in lumber costs. However, other costs such as wage inflation are stickier and probably here to stay. Finally, housing costs, which have yet to fully appear in inflation readings yet, will begin to affect the report in a bigger way and should keep inflation readings elevated. 

Another factor to consider is that the global central banks have pumped unprecedented amounts of liquidity into the market which has distorted all price discovery, including bond prices.  Also, the U.S. interest rates remain some of the highest in the developed world.  It is ironic that a country such as Greece has lower bond yields than the U.S. while being a much worse credit risk. Should the markets become untethered from the Fed’s belief in inflation being transitory, rates will move up quickly.  The next couple of months will be very interesting and could lead to much more volatile markets.  Potential borrowers who have not taken advantage of these ultra-low interest rates should do so while the window is still open. It is hard to imagine with such strong economic growth that the Fed keeps short-term rates pegged at zero for as long as originally projected. 

As we move into the middle of summer, purchase and refinance applications remain robust. Low-interest rates continue to drive purchase-money business, but there appears to be a pause in-home price increases as we have seen a very healthy increase over the past year that is not sustainable.  Lenders remain eager to lend and non-QM programs are helping borrowers who do not fit inside traditional banks.     

07_09_2021_blog

Market Commentary 7/9/21

Posted on by Damon Germanides

Rates Fall Then Rise As Markets Await Key Inflation Data

Bond yields fell mid-week and then recovered Friday. The drop in bond yields appears to be due to technical moves more than concerns about a slowing economy. The more virulent Delta variant of Covid is spreading widely and swiftly, potentially threatening to dampen the global economy.

Some economists are concerned about “stagflation” as a result of falling yields while inflation is rising. For the moment, the economy remains strong and those fears are not justified. Yet with central banks pumping trillions of dollars into the financial system, true price discovery and market independence have been lost. Therefore, we should be cautious about the unknowns of these never-before-seen policies. With equities and housing at record levels, volatility could pick up in the back half of the year. Next week, all eyes will be on key inflation data. Should the print be hotter than expected, the Fed will be under pressure to do more sooner. This could have a big impact on all markets.  

Mortgage volume in the jumbo sector remains robust. Borrowers are eager to close on either refinances or new purchases, as evidenced by the high volume of SBA loans, commercial building purchases, and high-end residential purchases. Low interest rates locked-in long-term are helping buyers justify the high cost of homeownership. 

06_25_2021_blog

Market Commentary 6/25/21

Posted on by Damon Germanides

Core Inflation Readings Push Yields Up
Core inflation came in hot, but not hotter than expected. Bonds reacted by pushing yields above up. However, within the report, spending slowed a bit in May and incomes flattened. A slowing in spending is good for the Fed. It will also allow them to continue to print money and prevent them from lifting rates quickly. However, assuming that pandemic-related illness rates in the U.S. continue to decline, the Fed will need to pull back on some of the extraordinary policies that were enacted to combat Covid’s impact on the economy.

Equities have responded well to the Fed’s messaging. A new infrastructure plan will create another boost to the economy and will create good new job opportunities.  

Rising housing prices are beginning to create issues for borrowers, especially in the lower-income tiers, as the combination of rising prices and higher interest rates affect home affordability. If rates do move higher, housing prices will need to adjust.  

Interest rates remain low but could move up sooner than expected if inflation is deemed more structural and less transitory by investors and economists. We continue to advise clients to take advantage of these ultra-accommodative interest rates and to lock in long-term financing as a hedge against inflation. 

06_18_2021_blog

Market Commentary 6/18/21

Posted on by Damon Germanides

Fed Talks Of Tapering Drives Rates Lower – Go Figure

The Fed’s shift in policy acknowledged inflation is running hotter than expected. They also confirmed that the tapering of the Covid emergency policy responses was met with big inter-week swings in interest rates and increased volatility in equities. We will see if this change in Fed policy will create the so-called “Taper Tantrum” that we witnessed the last time the Fed tried to unwind its ultra-easy fiscal policies. However, with the 10-year Treasury around 1.500%, interest rates are still very attractive. This ultra-low interest rate environment has encouraged prospective buyers of all assets (stocks, real estate, crypto) to take on more risk either by buying real estate at elevated prices, purchasing stocks over bonds, or hedging dollar depreciation by buying alternative assets.   

A lack of housing supply continues to nudge prices higher. However, affordability is becoming a big problem. If interest rates move up, there will need to be an adjustment in the supply and demand equation, and home prices will be under pressure. We are starting to see appraisals unable to come in at value on certain purchases. With the pandemic waning, perhaps buyers will not be so eager to stay in escrow, especially if the home does not appraise.  

Non-QM or alternative lending is really picking up steam. Lenders are pushing products out to the non-traditional borrower in a manner I have not seen in many years. Thankfully, lenders are keeping the loan to values reasonable so borrowers still have real skin in the game. Loans to foreign nationals, no income verification loans, and asset-based loans are all back with a vengeance. Insignia is placing loans with many lenders and are closing transaction up to $15 MM with very low-interest rates and interest only. The search for yield is driving the products and it will be interesting to see what happens if interest rates rise.

05_07_2021_blog

Market Commentary 5/7/21

Posted on by Damon Germanides

Interest Rates Tick Higher As April Jobs Report Disappoints

A surprisingly horrible April jobs report sent bond yields down and lifted stocks higher in early morning trading. This report caught many of us off-guard given that the economy is on fire and many businesses are starting to see a return to normal. It is unclear if this was just a one-off poor jobs report, especially given the strong numbers out of payroll giant ADP regarding the jobs recovery earlier in the week. However, some experts, including folks in the Commerce Department, are asking the powers that be to re-think the extended Covid unemployment benefits. This comes on the heels of many customer-facing businesses complaining that they are finding it hard to entice new workers, even after raising wages and offering other incentives.  

Asset inflation has been seen for quite some time, as has commodity inflation. There is no doubt that goods and services are becoming more expensive, regardless of what official data states. Consumers don’t need to look past the cost of food, gas, or housing to see that for themselves. Business owners can plainly see inflation in their cost of operations. Many businesses with competitive advantages are raising prices. CEOs of major enterprises are seeing inflation pressures that have not been felt in many years. The big question is: when does inflation become a big enough problem to cause the Fed to react. For the moment, the bunk April’s jobs report has given the Fed cover to remain ultra-dovish for longer, especially as the unemployment rate rose to 6.1%.

As the market digests this counterintuitive jobs report, real estate borrowers may have another window to look to lock in extremely accommodative long-term interest rates. Insignia Mortgage has been advocating for months to take advantage of the Fed’s desire to keep interest rates low for longer before the window closes. The pandemic will end eventually and with incredibly robust economic growth at some point, the Fed will need to taper its bond-buying and artificially suppressed normal level of interest rates. However, it looks as if this jobs report will prop open the window a bit longer.

04_17_2020_blog

Market Commentary 4/17/20

Posted on by Damon Germanides

The details of reopening our economy are still in flux. State governors are taking the lead and will coordinate their efforts for optimal results in that arena. Equity markets responded positively on Friday to some positive news from our biotech sector on cutting-edge coronavirus treatments. While we are a long way from a normally functioning economy, any and all positive news on how we can start to get back to work is welcomed. Expect April economic data to be horrific. The hope remains in a May re-opening of the economy safely and gradually. Look for a tick up in auto sales both new and used as a signal that we are returning to normalcy.

A national shutdown is a black swan event that is rarely accounted for in investment or lending assumptions. The pandemic has caused great suffering with unemployment expected to hit somewhere between 15% and 30% near-term, with a recovery thereafter. It is no easy task for lenders to navigate an environment where income is on hold, liquid reserves have been hit hard, and appraised values are expected to be lower, not higher in the foreseeable future. This is why lending rates are priced higher than what borrowers are expecting, which seems contradictory in this environment. The link between U.S. government and mortgage spreads has untethered as portfolio lenders (the only lenders in the jumbo mortgage space) demand a higher premium for elevated risk levels.

Portfolio banks are where deals can be done quickly and with certainty and this is where Insignia Mortgage shines. Our lending relationships for residential transactions are fully functional and while guidelines have been pulled back, you can expect reasonable purchase and refinance applications to close. Interest-only loans are still available as are cash-out up to 60% to 70% loan-to-value deals. We anticipate interest rates to gradually move lower as economic activity is ramped up along with the assumption that the virus curve declines as the economy opens.